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SBI Merger with Five Associate Banks & its Effect

SBI Merger with Five Associate Banks & its Effect

The government declared the record merger of the State Bank of India with its five associate banks on April 1, 2017. The five associate banks are the State Bank of Bikaner and Jaipur (SBBJ), the State Bank of Mysore (SBM), the State Bank of Travancore (SBT), the State Bank of Hyderabad (SBH) and the State Bank of Patiala (SBP).

Initially, SBI had seven associate banks two of them being the State Bank of Indore and the State Bank of Saurashtra that were merged earlier.

Why was the merge necessary?

No Indian bank has featured among the top 50 banks globally.

SBI was ranked 52 in the world in terms of assets in 2015, according to Bloomberg, and a merger will see it break into the top 50.

This has been the largest merge in the banking history of India.

What will happen as a result of the merging?

All shares of these associate banks will be transferred to the SBI and will stop existing as individual entities.

According to the ratio approved by the board of SBI in August 2016, the SBBJ, the SBM and the SBT are listed entities, while the SBH and the SBP are unlisted. SBBJ shareholders will get 28 shares of SBI for every 10 shares. Investors in the SBM and the SBT holding 10 shares will get 22 SBI shares each.

As a result of the merging all SBI associate bank customers will become SBI customers and all associate bank employees will become SBI employees.

Similarly all associate bank employees will be eligible for retirement benefits as that of SBI employees.

How will the Merging Affect the industry?

SBI being the country’s largest lender it has a lot of bad loans on its books. But, even the associate banks have accumulated large amounts of bad loans. When the entities are merged, these bad loans will become part of one bank.

A merging among banks can cause negative impacts on the profit of the combined entity due to various transition issues like the State Bank of Travancore and State Bank of Mysore have already reported losses in the December quarter owing to the asset quality concerns on their books.

It cannot be assured that the merged entity would gain because of the low-credit growth period of around 5% year-on-year.

SBI has been ahead of all other banks in regards to innovation and incorporation of technology compared to the other associate banks. However, after the merger, the rollout of all these solutions will have to take place at a much larger scale, adding to the cost of making this technology available to customers. There will also be concerns regarding security of the customer data across these associate banks.

In recent years, SBI and its associate banks have opened a large number of branches across the country. With the merger, the need to have two or three branches in close proximity will be required to be merged to the main branch. This principle may also be applied on automated teller machines (ATMs), in a bit to manage the cost of this merger.

With the merging operation the headcount will be a rising concern. They are required to transfer and adjust to the new environment. Additionally, pending promotions may also be postponed meanwhile till the merger is fully completed.